How to Calculate an IRS Gift Tax

by David Rodeck, Demand Media
    You only need to report gifts larger than $13,000 to the IRS.

    You only need to report gifts larger than $13,000 to the IRS.

    If you give someone a valuable gift, you could owe gift taxes on it. The gift tax is only charged on large transfers of assets, and most gifts are too small to be taxed. As of 2012, you can give up to $13,000 per year to one person and not have to report anything to the Internal Revenue Service. If you give someone more than $13,000 worth of property, you need to report the gift to the IRS and you could owe taxes on it. It is your job as the donor to pay the gift tax, so calculate your tax bill before making a gift so you save enough money to pay the IRS.

    Step 1

    Calculate the fair market value of your gift. This is the price that a normal buyer and seller would agree upon. Your calculation depends on what you are giving away. If you give away stocks, you can just look at their current value in the market. If you give away real estate, you need to use an appraiser to value your property.

    Step 2

    Subtract your $13,000 annual deduction from the value of your gift. If the gift was larger than the $13,000 deduction, you need to file a gift tax return.

    Step 3

    Review how much you have remaining in your lifetime gift tax exemption. As of 2012, you have a $5,120,000 lifetime gift tax exemption. This is the amount you can give away tax-free on top of the annual deduction. For example, if last year you made a gift of $1,013,000, the annual deduction takes off $13,000 and the other $1 million is taken off your lifetime exemption. You have $4,120,000 remaining in your lifetime exemption.

    Step 4

    Subtract your remaining lifetime exemption from the value of your gift after the annual deduction. If your lifetime exemption is larger than the gift, you won't owe any taxes. If the gift is larger than your lifetime exemption, you will owe gift taxes.

    Step 5

    Multiply the remaining value of your gift by the gift tax rate. As of 2012, the gift tax rate is 35 percent.

    Step 6

    Report your gift on IRS Tax Form 709 and pay your owed gift taxes.

    Tip

    • You never pay gift taxes on transfers to your spouse or to charity.

    About the Author

    David Rodeck has been writing professionally since 2011. He specializes in insurance, investment management and retirement planning for various websites. He graduated with a Bachelor of Science in economics from McGill University.

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